Risk premia in the term structure of crude oil futures: long-run and short-run volatility components

Naomi Boyd (), Bingxin Li () and Rui Liu ()
Additional contact information
Naomi Boyd: West Virginia University
Bingxin Li: West Virginia University
Rui Liu: Duquesne University

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 4, No 6, 1505-1533

Abstract: Abstract This paper studies how volatility affects the risk premium in crude oil futures through a discrete-time term structure model with long-run and short-run GARCH-type volatility components. Estimated using WTI crude oil futures data from January 1990 to July 2016, our model simultaneously matches futures prices and volatilities for the nearest twelve maturities. We document a significant positive relation between volatility and futures risk premia before May 2005, but a significant negative relation after that. The dynamic change of the risk-return relationship concur with the structural change, specifically the financialization, in the commodity markets. Risk premia decomposition indicates that the short-run volatility component represents the most important contribution to futures risk premia, both before and after the structural break.

Keywords: Commodity futures; Term structure models; Volatility components; Long-run and short-run; GARCH; Futures risk premium; G12; G13 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11156-021-01032-w Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:58:y:2022:i:4:d:10.1007_s11156-021-01032-w

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-021-01032-w

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().